hobbit

The Prem Watsa-owned company that runs Bengaluru airport has charted a course that has seen it grow steadily and profitably, and bridge the gap to its peers in Delhi and Mumbai. The challenge of monetizing a large expansion lies ahead Last week, Mint reported that Fairfax India Holdings Corporation, controlled by Canadian billionaire Prem Watsa, was planning to sell its 54% stake in Bangalore International Airport Ltd (BIAL). For now, Fairfax has denied this, saying it was a “long-term shareholder". Whichever way it goes, the Bengaluru airport has been a prime asset in Indian aviation as it has competed with its larger peers at Delhi and Mumbai. That’s why Watsa’s moves will be keenly watched. In the five-and-a-half years of Fairfax at the helm, BIAL has basked in profitable growth and endured a shutdown, and continued with a planned expansion despite some of its cash flows not materializing. Between 2011-12 and 2018-19 (the last full year unaffected by the pandemic), the airport registered higher growth in passenger numbers than Delhi and Mumbai, in both domestic and international segments. Bengaluru’s growth did come on a lower base, though the difference in size is more pronounced in the international segment than in the domestic segment. As a result of this higher growth, Bengaluru has bridged the gap with both Delhi and Mumbai, especially in the domestic segment. For example, in 2011-12, for every 100 domestic flights that left Delhi, 46 took off from Bengaluru. In 2018-19, this figure for Bengaluru had increased to 61 and was close to matching the 67 of Mumbai, which was constrained by capacity. The pandemic disrupted this time series and business plans. But as Indians take to the skies again, the relative growth of India’s three largest airports—which also intersects with demographic shifts—will be keenly watched. Crown jewel In Fairfax India’s portfolio, BIAL is the jewel, be it on size, visibility, returns or value to be unlocked. Fairfax India made its first investment in August 2015. As of 31 December 2021, it had invested $1.79 billion. Given the value of its listed holdings on the stock market and Fairfax’s internal estimates for unlisted holdings (like BIAL), it listed its portfolio’s fair value as $3.34 billion. BIAL accounted for 41% of the portfolio value and 46% of its underlying appreciation. In September 2021, the sale of a minority stake to a Canadian pension fund valued BIAL at $2.6 billion. Fairfax India expected a subsequent planned listing of a holding company, which hasn’t happened yet, to raise that to $2.9 billion. In its 2021 annual report, it said: “The marketability of BIAL to large pension funds and strategic global airport operators, even as an unlisted company, is very high…we believe that it [true value] could be much higher than $2.9 billion." Growth flight While Delhi and Mumbai airports were privatized in 2006, Bengaluru came up from scratch in 2008. Fairfax took over from GVK Group as the principal shareholder in 2017. The other shareholders currently are Siemens (20%), the government of Karnataka (13%) and the government of India (13%). Airports have two broad revenue streams: aero (what they charge airlines for navigation, parking, ground handling) and non-aero (rentals, shops, advertising). While a split for BIAL is not available, the company that owns the Delhi airport derived 30% of its 2018-19 operational revenue from the aero side and 70% from the non-aero side. MINT PREMIUMSee All PREMIUM FY24 capex goal may be raised to ₹10 trillion PREMIUM Tata Steel’s mixed outlook tales: Improving India, dull ... PREMIUM PMI: India’s export  cheer  on  last  legs PREMIUM Why Bengaluru airport is a prized aviation asset The decade leading up to the pandemic was one of healthy growth for Indian aviation, both airlines and airports. According to Fairfax India, between 2009 and 2019, aero revenues of BIAL grew at a compounded annual growth rate of 16% and non-aero revenues at 17%. It was also highly profitable, earning a net margin of 33-42% between 2016 and 2019, before the pandemic wrecked its numbers. Funding an expansion For BIAL, the pandemic came at an inopportune time. In December 2019, it started its second runway. To its first terminal, which handled 33 million passengers in 2018-19, it is adding a second terminal: first phase this calendar (to handle another 25 million passengers) and second phase in 2028-29 (20 million). A tripling of capacity will give it infrastructure to bridge the gap to Delhi and Mumbai further. In 2018-19, BIAL’s had revenues of about ₹1,440 crore. This was only about 38-39% of Delhi and Mumbai, which lead in international traffic. BIAL, though, does better on profitability. At the same time, its aero revenues are likely to be lower than expected as the regulator has cleared a smaller increase in per passenger fee that BIAL can charge airlines from 2022-26. Balancing expansion with growth and profitability will test BIAL in the coming years.

one has to take these speculative news articles with a grain of salt since a lot of the times in the past they have been proven to be wrong. FIH might well be exploring a sale of BIAL if they can get something north of $2B which is what they were expecting in an IPO and would be in line with the recent airport transactions in India. If they can capture most of the upside that they would get in an IPO without having to worry about approvals causing delays etc it might not be a bad idea. However investing it into IDBI might be a very risky bet. One condition to bid for IDBI is to have a minimum of $2.85 B in equity and if you combine BIAL(2B) + Fairchem(250 MM ) + IIFL wealth(190 MM) + possibly NSE(250 MM ) too + cash (200MM) , that is where FIH is headed.

sell growing BIAL, buy stressed out IDBI and try to turn it around. typical Fairfax . never learn

https://themorningcontext.com/business/the-silent-sure-rise-of-prem-watsa-in-india

https://www.livemint.com/companies/news/iifl-mega-deal-abu-dhabi-s-adia-to-pump-in-rs-2-200-cr-in-iifl-home-finance-11654794726574.html The market cap of the entire company as of today is only INR 12500 Crore ( 1.6 Billion USD) . Should be an easy 2X from here which means an additional 350M to FIH book value.

I have absolutely no doubt that BIAL airport with 2 terminals and 70M annual passenger capacity, BIAL is worth more than 4B . Sydney airport was recently privatized at 4 times that. (17B equity and 25B enterprise ). Pre-covid Sydney airport was 3x more profitable than BIAL with much worse growth profile. As Indian economy grows and passengers spend more, even a 4B valuation might look silly. I think discount arises from the perception that Indian Govt can do random stuff which could be detrimental to shareholders like they have done with the recent tariff order. India has always been a country with socialistic tendencies and only in the last 10-15 years has taken a turn towards capitalism. it will take time for the market to accept that there is no turning back from this change of stance. Modi getting reelected will certainly reinforce that. Until then BIAL is quietly building up its intrinsic value and no one knows when the gap between share price and BV will close. Omers deal is moot since omers has a 'special' relationship with fairfax which allowed them to negotiate a ratchet clause which makes it valuation questionable. But i am not worried about this at all since as long as Indian govt stays does not interfere , the value of BIAL will be realized. Even an IPO might not close this gap since this is a perception problem about the entire country, airport being a public asset. Also IIFL finance , CSB and chemplast are significantly undervalued here. Just take a look at the numbers IIFL finance posted a day ago and TCI egypt is marked at 250M on FIH books whereas its true value is closer to 1B

haha yes! if you take $9.50 as IPO (2015) price, a $30 book value today would be a 17-18% CAGR net of fees. I think if you are investing in India via any equity fund, venture , PE etc that is par for the course in terms of risk adjusted return. They have traded as high as 1.4 *BV so $30 seems reasonable to me. Given the current investments and the outlook I would be extremely surprised if they do not do 18% CAGR net of fees.

$30 + stock if BIALand Sanmar are marked accurately. They are being too conservative which is probably the right thing to do but eventually this gap will close.

Unless there is an immediate plan to use this cash for example for share buyback etc , this is not a good price. A large stake sale such as this normally comes at 20%+ premium to the trading price . IIFL wealth is doing really well as a business but there is a case to be made for buying back shares of FIH at these prices. BIAL is the fastest growing major airport in the world with a second terminal coming online at some point later this year. There is a clear path to 200M in EBITDA. I would not be surprised at all if there is a significant markup in the valuation of BIAL ( >80%) from the current 2.6B in near future barring another wave of COVID.

IMO takeover by FFH will never happen. The whole point of forming FIH was to have the flexibility to do investments that they cannot do through FFH. Also having a nice fee stream does not hurt.

Thesis on Fairfax India at MOI https://moiglobal.com/jeffrey-stacey-202201/

https://www.thehindubusinessline.com/markets/stock-markets/demerged-gmr-infra-starts-trading-in-bourses/article38241204.ece

This will help discover true value of BIAL. First airport business to be listed in India with 64% stake in Delhi airport. I believe the demerger date is Jan 11 https://www.livemint.com/companies/news/gmr-group-gets-nclt-nod-for-demerger-of-non-airport-businesses-11640265265179.html https://investor.gmrgroup.in/pdf/GMR Demerger_Investor Presentation.pdf Could be a catalyst for FIH

HWIC which owned 7%approx of IIFL finance sold the entire stake in the past few days. Wonder what this means for FIH's stake...signs of underlying issues at IIFL finance maybe? optically it looks cheap but there might be hidden stress in their book https://www.business-standard.com/article/companies/prem-watsa-backed-fairfax-group-sells-iifl-finance-shares-worth-rs-180-cr-121120801251_1.html

https://economictimes.indiatimes.com/prime/transportation/privatisation-of-airports-heres-why-patience-will-be-the-most-prudent-strategy-for-aai/primearticleshow/88058633.cms?from=mdr Excellent article . Fairfax India's airport valuation is most likely conservatively marked.

https://www.cnbc.com/2021/11/07/sydney-airport-signs-17point5-billion-buyout-deal-one-of-the-biggest-buyouts-ever-in-australia.html bodes well for Bangalore airport .

good results from Chemplast...for me the most exciting business in portfolio right now https://archives.nseindia.com/corporate/CHEMPLASTS_31102021222444_CSL_Investor_Presentation_Q2_FY22.pdf https://economictimes.indiatimes.com/markets/stocks/recos/buy-chemplast-sanmar-target-price-rs-940-icici-securities/articleshow/87479994.cms

Fairfax India has NSE shares valued at INR 1400 approximately NSE update https://economictimes.indiatimes.com/markets/ipos/fpos/bourse-depository-stocks-rally-amid-talk-of-nod-for-nses-ipo/articleshow/86572837.cms " Unlisted shares of NSE are currently trading at Rs 3,300-3,500 per share, valuing the exchange at nearly Rs 1.75 lakh crore. The shares traded at Rs 1,750 apiece in March as against Rs 900-1,000 in September last year. "

https://archives.nseindia.com/corporate/CHEMPLASTS_05102021193005_Business_Update_05102021.pdf Chemplast shared this update today

i will try to do a detailed post later but essentially this https://www.indiainfoline.com/article/news-top-story/chemplast-sanmar-hits-record-high-after-crisil-assigns-‘a-positive-a1-’-ratings-to-its-bank-facilities-121100400216_1.html and mark up in egypt business

https://thedeepdive.ca/pvc-prices-soar-to-record-high-as-homebuilding-becomes-even-more-expensive/ http://www.sunsirs.com/uk/prodetail-368.html Chemplast is marked at 440M on books. It could easily be worth 2x

Sanmar Look at the finance costs for 2021 . This should drop drastically post IPO. Essentially there ipo price is at almost half the P/e of their peers. https://twitter.com/nbalajiv/status/1424426082002882561?s=20

Airport Valuation - If Anchorage was public PreCovid , there is little doubt that its share price would have corrected anywhere between 30-50% post Covid crash in mar 2020. I was/am of the opinion that FIH should have marked down their investment even if it was a temporary markdown. FIH not marking down its investment in BIAL reflects the tremendous confidence they have that BIAL is optimally/conservatively marked .This confidence stems mainly from 2 things - the second terminal coming online next year and ability to claw back revenue in the next control period. FIH's enthusiasm from BIAL is not shared by the market including their partner OMERS who added a ratchet clause to protect themselves from any downward revision in valuation.This is again a classic case of whether you trust the mgmt or not. I for one do not think that mgmt will deliberately mark up the investment just to earn fees. Fairfax mgmt might be completely out of sync with market dynamics but I do not think that they are blatantly dishonest. 5 years down the line as the second terminal has fully ramped up , we are hitting 70M in annual passengers and Indians have more money to spend , BIAL will be conservatively worth 5B+ Shanghai airport has been one of Li Lu's best investments and the similarities here are striking. I believe munger also owns the stock or has owned it in the past. One of the things we got into [in China] was the Shanghai airport, the main airport in China, with no debt net,” Munger said. “How can you lose owning the main airport in China?” Dutch Auction - I think it's the best way to reward existing shareholders and also an important indicator of mgmt's conviction in the portfolio companies. Returning cash at this point in time also implies none of the companies are under significant financial stress and have no need for external cash for the foreseeable future. The only drawback that comes to mind is that this might shift the timeline for the IPOs until August as the mgmt would want to buy the shares at the lowest price possible. ( unless investors tender shares right away ). It could also be that OMERS or some other big shareholder wanted to liquidate their holding and approached FIH. Modi- I think Modi has done a decent job given what he inherited when he became PM. India is still deeply socialist due to the close ties India had with Soviet for more than 40 years post independence. It is not easy to reform the country and give it a capitalistic structure. It will take time. The fact that India has not had a big corruption scandal at the federal level since modi took over is a huge plus. I definitely feel the country is headed in the right direction. Polarization in the society along religious lines is the biggest disappointment so far in imo and hopefully things get better on that front. Regarding re-election there is very little chance that he does not serve at least another 2 terms.

It all depends on the time line for the IPOs. I think Seven islands and Sanmar happen this year . Anchorage and NSE next year.

My 2 cents on this 1.Public investments - (a) IIFL ( finance(327M) + wealth Mgmt.(202) + Securities(54) +5paisa(23) ) + CSB (230M ) = 834M ( 31 mar 2021). Conservative Fair Value in 2 years = 1.3*834 = 1.1 B India's NBFC sector has gone through a tumultuous time in the past 3 years. First with ILFS crisis and then with two waves of COVID. This is possibly the harshest stress test any NBFC can go through and the fact that IIFL finance has come out of it unscathed tells you a lot about strength of their loan book. The loan book is heavily focused on retail and gold loans and a very small part is corporate . A well run NBFC in India should easily give you a 20%+ CAGR in earnings and coupled with a growing economy could be one of the best ways to play India story. IIFL finance is trading at an earnings multiple of 10 and I do not see it staying there as Indian economy starts opening up. Only 3.7% of Indians invest in stocks vs 50%+ in US. India will mint new millionaires every year. These two factors alone are significant tailwinds for IIFL securities and IIFL wealth mgmt business . IIFL securities was trading at 4*earnings( net of 100M property that it owns in Mumbai) at the end of last quarter and is up by 80% since. CSB is already a phenomenal turnaround story which is reflected in its financials and share performance. Its not too hard to imagine what a good CEO can do with a bank in a growing economy like India. It is extremely hard for a foreign operator to get a banking license in India . 5 Paisa recently raised equity worth 33M at a 70% premium to the share price and the stock has doubled since then . (b) Fairchem + Privi = 64 + 163 = 227M. Conservative Fair value in 2 years = 163M + 64*2 = 291M Privi has been liquidated for 163M already. The day the announcement was made FIH stake in privi was worth 233M. This deal puts Fairfax mgmt in rarified circles of investing community since its extremely rare(never) to sell your stake for a 30% discount to a promoter . Especially when there is no pressing need for cash. A self goal by the Fairfax team. Fairchem is doing well and has a huge room for growth. The share price has doubled since the last quarter . (c) Other public Equities = 160M .Conservative Fair value in 2 years = 160*1.2 = 192M With the recent run up in India market . I imagine they are doing okay here. 2. Private investments - Anchorage/Bangalore Airport - ( 1.4B ). Base case Fair value = 1.4B PreCovid A new runway at the current terminal has been operationalized which will help BIAL to overtake Mumbai in terms of domestic traffic. Second terminal on track for mid 2022. (It looks amazing btw.) A cybercity under construction on 400acres around the airport. A clear path to 70M+ passengers from the current 35M in 5 years. Adani trying to list their airport assets for 4B+ .The other public airports around the world trading at 1.5-2 times the multiple of Bangalore airport. BIAL has a claw back provision for Aero revenue which guarantees them a fixed 15% return on equity in any given control period. This should help them recover a significant amount of lost revenue over the next 2-3 years. PostCovid - I think based on the factors above FIH should not find it hard to list BIAL( via anchorage ) for 2.8B+ . Without COVID, the valuation could have easily been 4B+. Mgmt indicated in the annual report that despite covid, 2.8B valuation for BIAL is fairly low and they expect better pricing in public markets given the marketability of an asset like BIAL. Sanmar - ( 338M ) . Base case Fair value in 2 years = 700M This is a hidden gem in the portfolio which could be worth 3-4x from current prices ( 80%) or go to zero ( 20%) . PVC pricing is at all time high but sanmar is facing a liquidity crunch which has forced their hand to go for an IPO an year sooner than what they would have liked. If you read the IPO circular , it becomes clear how undervalued Sanmar is at 1B valuation. FIH is flush with cash even post tender offer and will not let their equity get affected and might provide a short term loan if needed. Sanmar merged their India businesses earlier this year and is going to aim for a combined valuation of 2B+ for their India business when they ipo this year. Then you have the Egypt business which could be worth another 500M easily. all this is dependent on whether they can tide over their current liquidity situation ( I think they will ). Post the equity raise there is a clear path to 200M in EBITDA within 2- 3 years for just their India business, which as per the valuation of their peers ( 20X multiple to earnings) should put just india business at 3-4B valuation. Sanmar is paying interest rates as high as 18% on their debt and will significantly bolster their cash flow if the IPO is successful since most of the IPO proceeds will be used to pare down debt. Seven Islands - (104M ), Base case Fair Value post IPO = 200M This business has been growing EBITDA at a 30% CAGR for the past 10 years. Past year revenue and earnings grew by 57% and 87% respectively . Promoter owned and operated . Should easily list at 20x earnings giving it a valuation of 400M+. FIH is marking it at 105M NSE - ( 72M ) , Base case Fair Value in 2 years = 150M Based on the transactions in pvt market earlier this year , FIH stake is easily worth north of 100M today and will be worth 200M+ when NSE IPO happens. FIH will keep marking it conservatively until the IPO. Covid volatility has given a tremendous boost to another already growing and monopolistic business. Here are the numbers NCML - ( 86M ), Fair Value in 2 years = 86M the only bad investment FIH has made so far. It has a decent chance of turning out okay given the strong tailwinds on the back of agriculture reforms initiated by the govt last year. Since there is no clear timeline of when the turnaround might happen lets keep it at where FIH is marking it. Saurashtra(33M) - Fair Value in 2 years = 33M too small to move the needle right now. Has been an okay investment so far. Cash = 100M after tender offer FIH Fair value in 2 years = 4.2 B. Current value = 1.9B Debt = 550M Have to account for fees , taxes . Now the question arises why is the share price languishing at 0.7*BV instead of trading at a premium if the outlook is so rosy - 1. Mgmt Credibility - In the past 2 years I have spoken to 20+ fund managers and individual investors regarding Fairfax Financial as well as Fairfax India and almost none of them want to touch anything that has Prem Watsa et al incharge. No one cares about their long term track record given their horrendous performance over the past decade . Prem's ramblings on tech valuations and value investing in his annual letters has reenforced the view that he is living in denial and is incapable of admitting and learning from his mistakes. The Mgmt gets a solid C from the market right now. Imo Prem et al have earned it and deserve it .This is reflected in the valuations of Fairfax Financial , India and Africa. The sentiment is so heavily tilted against the current mgmt that it almost makes a case for being a good contrarian indicator. Fairfax India has borne the brunt of this negative sentiment despite having invested in some quite decent businesses. A a couple of examples on why mgmt gets a C from me ( for now ) - (a) Fairfax financial gets paid in shares of FIH based on the appreciation in BV regardless of whether the shareholders of FIH make money or not. This BV is dominated by private investments which FIH mgmt is marking . A better way of doing this should have been to take the minimum of ( BV, share price ) and charge fees based on that so that fees only get paid when shareholders are making money too. (b) Transaction with Privi at 30% below market price with zero explanation to minority share holders 2. Lack of price discovery - There is a lack of clarity whether FIH is a PFIC or not for US investors. This rules out most of investment from US. India is an emerging market which is a negative for a lot of Canadian Investors. Coupled with a small float and almost zero smart money looking at this, price discovery has been significantly hampered. If you look at the ownership structure of Fairfax India ; OMERS, FFH and host of mutual funds are biggest share holders. FIH is the biggest buyer at 25% of daily volume almost every day. 3. COVID - there is still a lot of uncertainty whether India will experience a third wave or not. I have been invested for the past 3 years+ and post the crash in share price during COVID made it by far the biggest position in my portfolio.